CWS Market Review – March 25, 2011

After overreacting to the events in Japan and Libya, the stock market is slowly returning to normal. On Thursday for the first time in two weeks, the S&P 500 finished the trading day above its 50-day moving average, closing at 1,309.66, an impressive turnaround from the March 16th intra-day low of 1,249.05. That’s nearly a 5% bounce in less than six days.

Another good example of the market’s return to normalcy is the fall-off in the $VIX , which is often called “the fear index.” Before the earthquake, the VIX was ranging in the upper-teens. Then everyone freaked out and on March 16th, the VIX got up to a high of 31.28. But on Thursday, it closed at just 18. The message is clear: the fear is subsiding.

Several of our stocks have rebounded quite well. Leucadia National ($LUK), for example, just hit another new 52-week high. The stock is already a 25% winner for us this year. I love LUK, but I never would have guessed it would be our top-performer in the first quarter. Sometimes you never know which stock will be your breakout star!

I’m also impressed by how well our Buy List stocks are holding up versus the market. In the last week, our Buy List gained 3.42% compared with 2.82% for the S&P 500. For the year, we’re up 5.72% to the S&P 500’s 4.14%.

I’m also pleased to see that shares of AFLAC ($AFL) have come back strongly, but I still think they have a way to go. AFL closed Thursday at $53.07 which is a big turnaround from touching $48 only a few days ago. On the blog, I posted two videos of CEO Dan Amos reiterating that the company is doing well and that they have no change to their full-year forecast. It was also nice to see shares of Ford ($F) break $15 on Thursday. The stock had its highest close this month.

But now let’s focus on the great earnings report from Oracle ($ORCL). The company had already said that it was expecting earnings for the February quarter (the third of their fiscal year) to range between 48 cents and 50 cents per share. Wall Street’s consensus was 50 cents per share. In last week’s issue of CWS Market Review, I said that I was expecting Oracle to earn 53 cents per share. Well…I was right in that they beat their forecast, but I was off by a penny. Oracle earned 54 cents per share!

This is very good news for Oracle. For last year’s third quarter, they earned 38 cents per share, so 54 cents this year represents very strong growth. Oracle also announced that it is raising its small quarterly dividend from five cents per share to six cents per share. I’m particularly impressed by the way Oracle is integrating Sun Microsystems into the Oracle universe. Sales of new software licenses jumped 29% to $2.21 billion. That’s often a good indicator of future revenue. Total revenue rose 37% to $8.76 billion.

I had been hoping that the company would offer guidance for its fourth quarter, which is historically its strongest quarter, but I haven’t seen anything yet. (BTW, Larry Ellison missed the conference call due to…jury duty. I’m completely serious.) On Thursday, the stock closed at $32.14. I think it’s very likely that ORCL will break its current 52-week high of $33.71 very soon. I had said that Oracle was an excellent buy below $32 per share. After looking at these earnings, I’m raising my buy price to $34 per share.

Next week is the final week of the first quarter (that was fast!). On Friday, April 1st, we’ll get the ISM report and the jobs report for March. I don’t expect much change in the ISM. The number will probably be in the high-50s or low-60s. I’ve often said that this is one of the best barometers for how well the economy is doing. The overall economy continues to expand but at a frustratingly slow pace.

The employment report is a different story. The economy simply hasn’t been creating enough jobs and I’m afraid that at some point, this will hurt the ability of companies to expand their profits. The unemployment rate peaked at 10.1% in October 2009. But even in the most recent report, 16 months after the peak, unemployment is still at 8.9%. Since the recession officially ended in the middle of 2009, the economy has created a grand total of 22,000 non-farm jobs.

Looking out a little further, Bed Bath & Beyond ($BBBY) is due to report its fiscal fourth-quarter earnings on April 6th. As odd as it sounds coming in April, this is the report that covers the crucial holiday shopping season (December, January and February). In December, BBBY said it expects its earnings-per-share to be between 91 cents and 95 cents. I wouldn’t be surprised to see BBBY beat this by a few cents per share.

For the first three quarters of BBBY’s fiscal year, they’ve earned $1.95 per share, so they’re on track to earn $2.86 to $2.90 per share for their 2010 fiscal year. That means the company is going for about 16.5 times trailing earnings which means that the shares are fairly priced.

I hope BBBY will be able to give full-year guidance for 2011. If they do, I’m looking for something in the neighborhood of $3.30 to $3.40 per share. I like the stock a lot but I wouldn’t say it’s a screaming buy unless it dropped about 20% from here.

That’s all for now. Be sure to keep visiting the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

Posted by on March 25th, 2011 at 8:11 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.